If you haven’t read Paul Krugman’s recent NY Times Magazine article “How Did Economists Get It So Wrong?“, I recommend it highly. One of the interesting things about Krugman is that he has been talking about this issue for over a decade. In a 1996 lecture, he presented an argument that economics needs to learn from evolutionary biology:

….consider the question of whether and how monetary policy has real effects. In the end this comes down to whether prices are sticky in nominal terms. In my view there is overwhelming evidence that they are. But many economists reject such evidence on principle: a rational price-setter ought not to have money illusion, therefore it is bad economics to assume that they do. If neo-Keynesians like me suggest that a bit of bounded rationality would do the trick, the answer is that bounded rationality is too open-ended a concept, and can be used to rationalize too many different behaviors.

And yet in evolution the idea that there are limits to the precision of maximization is adopted cheerfully. When a bird sees a predator, it issues a warning cry that puts itself at risk but may save its neighbors; the reason this behavior “works”, we believe, is that many of those neighbors are likely to be relatives, and thus the bird may enhance its “inclusive fitness”. But why doesn’t the bird issue a warning only its relatives can hear? Well, we just suppose that isn’t possible.

In short, I believe that economics would be a more productive field if we learned something important from evolutionists: that models are metaphors, and that we should use them, not the other way around.

While I have some problems with Krugman’s article regarding modeling*, it’s an interesting point of view. Obviously, as an evolutionary biologist, I’m flattered. Yet, in the 1996 article, he overemphasizes the role of theory in the successes of evolutionary biology. Sure, the openess of evolutionary biologists to the concept of non-optimality is an improvement over the dogmatic insistence that people behave rationally (optimally). But Krugman downplays what has led to the success of evolutionary biology: the triumph of data. In fact, there was a period where evolution was disparaged by other biologists because it was viewed as “just so stories”–tales with no data to support them.

On the old site, I joked several times that the difference between biologists and economists is that when theory and data collide, a biologist claims the theory is wrong, whereas an economist proclaims that the data are wrong (this resulted in several angry emails). But consider what Krugman writes in his NY Times article:

By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable. Unemployment is a deliberate decision by workers to take time off.

Put baldly like that, this theory sounds foolish — was the Great Depression really the Great Vacation? And to be honest, I think it really is silly. But the basic premise of Prescott’s “real business cycle” theory was embedded in ingeniously constructed mathematical models, which were mapped onto real data using sophisticated statistical techniques, and the theory came to dominate the teaching of macroeconomics in many university departments. In 2004, reflecting the theory’s influence, Prescott shared a Nobel with Finn Kydland of Carnegie Mellon University.

Sweet Baby Intelligent Designer, “[u]nemployment is a deliberate decision by workers to take time off”? That doesn’t even pass the smell test. Has Prescott ever been in the non-academic job market?

Ok, um, has he ever read about laid off employees? Again, Krugman:

Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

What seems missing is some good economic ‘natural history’–that is, data. Here’s what Krugman says about Steven Jay Gould:

What I encountered were quite a few references to Stephen Jay Gould, hardly any to other evolutionary theorists. Now it is not very hard to find out, if you spend a little while reading in evolution, that Gould is the John Kenneth Galbraith of his subject. That is, he is a wonderful writer who is bevolved by literary intellectuals and lionized by the media because he does not use algebra or difficult jargon. Unfortunately, it appears that he avoids these sins not because he has transcended his colleagues but because he does does not seem to understand what they have to say; and his own descriptions of what the field is about – not just the answers, but even the questions – are consistently misleading. His impressive literary and historical erudition makes his work seem profound to most readers, but informed readers eventually conclude that there’s no there there. (And yes, there is some resentment of his fame: in the field the unjustly famous theory of “punctuated equilibrium”, in which Gould and Niles Eldredge asserted that evolution proceeds not steadily but in short bursts of rapid change, is known as “evolution by jerks”).

What is rare in the evolutionary economics literature, at least as far as I can tell, is references to the theorists the practitioners themselves regard as great men – to people like George Williams, William Hamilton, or John Maynard Smith. This is serious, because if you think that Gould’s ideas represent the cutting edge of evolutionary theory (as I myself did until about a year and a half ago), you have an almost completely misguided view of where the field is and even of what the issues are.

This is unfair to Gould and Eldredge: the reason punk eek is no longer widely accepted** (although neither is it uniformly disparaged) is because it was confronted with the fossil record and found wanting. This is a point Barry Eichengreen makes:

The last ten years have seen a quiet revolution in the practice of economics. For years theorists held the intellectual high ground. With their mastery of sophisticated mathematics, they were the high-prestige members of the profession. The methods of empirical economists seeking to analyze real data were rudimentary by comparison. As recently as the 1970s, doing a statistical analysis meant entering data on punch cards, submitting them at the university computing center, going out for dinner and returning some hours later to see if the program had successfully run. (I speak from experience.) The typical empirical analysis in economics utilized a few dozen, or at most a few hundred, observations transcribed by hand. It is not surprising that the theoretically inclined looked down, fondly if a bit condescendingly, on their more empirically oriented colleagues or that the theorists ruled the intellectual roost.

But the IT revolution has altered the lay of the intellectual land. Now every graduate student has a laptop computer with more memory than that decades-old university computing center. And she knows what to do with it. Just like the typical twelve-year-old knows more than her parents about how to download data from the internet, for graduate students in economics, unlike their instructors, importing data from cyberspace is second nature. They can grab data on grocery-store spending generated by the club cards issued by supermarket chains and combine it with information on temperature by zip code to see how the weather affects sales of beer. Their next step, of course, is to download securities prices from Bloomberg and see how blue skies and rain affect the behavior of financial markets. Finding that stock markets are more likely to rise on sunny days is not exactly reassuring for believers in the efficient-markets hypothesis.

The data sets used in empirical economics today are enormous, with observations running into the millions. Some of this work is admittedly self-indulgent, with researchers seeking to top one another in applying the largest data set to the smallest problem. But now it is on the empirical side where the capacity to do high-quality research is expanding most dramatically, be the topic beer sales or asset pricing. And, revealingly, it is now empirically oriented graduate students who are the hot property when top doctoral programs seek to hire new faculty.

The one problem I find with Krugman’s recent article is the lack of emphasis on the need to brutally confront theory with data. There is one sentence at the end, “they’ll have to do their best to incorporate the realities of finance into macroeconomics”–but I think a lot more will have to be done than that.

*Mostly that he ignores population genetics, and, instead, focuses on behavioral models.

**Some, unfairly in my opinion, also thought Gould was a pompous ass. That probably didn’t help either.

Comments

Well, punk eek ceased to be controversial when people looked at the data (including Gould himself – have you read “the brick”?) and found it applies in some cases and not in others. It is in textbooks now, and nobody makes a huff about it because it is a natural and obvious component of evolutionary theory. And a lot of what Gould did right (and so did Lewontin next door at Harvard) was point out how deceptive some of the pop-gen math was (and yes, he understood it very well), leading us to think about evolution in wrong ways. Exactly the way economists do – falling in love with their math models without checking in with Nature to see if models actually represent reality. It is the pop-gen folks who reified their math models who did not like what Gould exposed – an empty theory unrelated to reality of the world.

Since any good scientific theory is an approximation, all that means is that a good model is a good theory (and a bad model is crap). If “you” think of them as mere “metaphors,” you’re missing the point about what theory is — and “you’re” probably reifying “your” theories (that “you” are under the mis-impression that they aren’t “models”). “You” probably also are making bad models — since they are mere metaphors.

In the economics world, the proponents of the “Austrian school” are widely considered cranks because they explicitly eschew the scientific method in favor of a pre-scientific method of deduction from first principles. This is an entirely fair assessment, but it overlooks the fact that most economists have been doing the same thing in practice for almost the entire existence of the field. That is, they start with several premises that are obviously wrong (perfect rationality, perfect self-interest, etc.) and discard any actual evidence that contradicts those premises.

You could attribute this tendency to a lot of things, including abject laziness in the face of having to do any of the intellectual heavy lifting involving in adjusting theories to fit data. But there is an elephant in the room here, and that is the symbiotic relationship economics has had with right-wing politics pretty much since its inception. Classical economics was born of and nurtured by the interests of industrial capitalists, and this connection has to be severed before it can become a legitimate empirical science.

Tyler DiPietro has a good point. Economics is still bound up with politics. This never works well for a science. Look at astronomy and the problems getting the heliocentric theory accepted. Look at genetics and the rise of Lysenko-ism under Stalin. Look at economics today.

when theory and data collide, a biologist claims the theory is wrong, whereas an economist proclaims that the data are wrong

Creationists and economists have this in common. All the arguments of the modern “intelligent design” movement are supposed theoretical reasons why evolution can’t work. Never mind that it did — that the data are inescapable. They don’t alter their theories to fit the facts.

Although Mad Mike and several commenters have defended Stephen Jay Gould, Krugman’s unflattering equation of Gould and John Kenneth Galbraith is also worth careful consideration.

…Gould is the John Kenneth Galbraith of his subject.

…his own descriptions of what the field is about – not just the answers, but even the questions – are consistently misleading. His impressive literary and historical erudition makes his work seem profound to most readers, but informed readers eventually conclude that there’s no there there.

I can’t quite see how this characterization fits Galbraith, a notoriously nuts-and-bolts economist who administered wage and price controls for Roosevelt during WWII, and Krugman is just as wrong about Galbraith’s historical “erudition.” If Galbraith was “erudite,” what would you call a historian like George Lefebvre, who spent twenty years digging through provincial archives all over France, or A.J.P. Taylor, or Isaiah Berlin?

There’s no doubt that Galbraith enjoyed a good general education, and not much more outside economics, and it probably isn’t in the realm of academe that Krugman’s peculiar resentment of J.K. Galbraith arises, but in the other world of celebrity and high society where Galbraith was perfectly at home, and where Krugman always looks like he wants to run under a refrigerator.

Paul Krugman is indelibly petit bourgeois, a very small man uncomfortably projected upon the grand stage of life by his brilliant intelligence alone, and his resentment of Galbraith is reminiscent of F.R. Leavis’ almost demented huffing and puffing about Ludwig Wittgenstein, who was “dear Louis” to the lords of Bloomsbury, where Leavis couldn’t even get in the door.

I assume Krugman’s real complaint against Galbraith is what Krugman has spelled out in some of his previous writing: Galbraith was a non-modeler. A large proportion of the academic economics profession believes that economics is pretty much all about models, and nothing else rates.

Krugman thinks that graduate students in economics can “download securities prices from Bloomberg and see how blue skies and rain affect the behavior of financial markets,” and Mad Max indulges Krugman’s fantasy in a made-to-order universe where we can “brutally confront theory with data.”

Obviously both of those hyper-intelligent individuals could avoid this sort of “abuse of language” at the price of tedious qualifications which would quickly overburden their readership and leave them talking into a vacuum, and nobody wants that, but nevertheless it may not be entirely out of place to wonder exactly how tedious those qualifications would have to be.

Unfortunately for all of us, the qualifications are endless, and we will never ever “see” a connection between cause and effect, neither on the Bloomberg ticker or even in a physics lab, where visual and conceptual “metaphors” are respectably anchored in standard procedures, but inevitably dissolve into the fog of quantum mechanics before anybody “sees” anything.

So what?

Everybody already knows that data only really “confront” the bleary eyes of weary lab assistants, and what’s the harm in a little convenient shorthand for what everybody already knows?

The harm is payrolls shrinking by hundreds of thousands of jobs month after month, and almost every relevant article in the New York Times winding up with a professor of economics somewhere “seeing” light at the end of the tunnel. Happy days are (almost) here again!

Meanwhile simple alternatives to watching this mess get worse, like hiring the unemployed for massive public-works projects which our disintegrating infrastructure absolutely requires anyway, get lost in a fog of Keynesian stimuli or Chicago laissez-aller, and outright destitution is now confronting millions of Americans more brutally than mere data will ever confront anything.

Obama’s stimulus was a bastardization of Keynesian deficit spending and Friedman-esque tax cuts, a grab-bag of almost all contemporary economies theories, and only the eyes of faith can “see” much in the way of results, but the same $700 billion package could have employed 6,000,000 people at $3000 per month tax-free for about 40 months, with no theoretical framework whatsoever except giving jobs to the jobless, and if our moribund economy still didn’t have a pulse after 40 months, at least tax-payers would have had some brand new bridges and thousands of windmills to show for their money, and 6,000,000 people would have also earned a living for what promises to be three lean, mean years.

I’m going to invert the order of two things you said to make a point that I elaborated on at Uncertain Principles (where I saw the link to this commentary).

On the old site, I joked several times that the difference between biologists and economists is that when theory and data collide, a biologist claims the theory is wrong, whereas an economist proclaims that the data are wrong (this resulted in several angry emails).

Of course they were angry. Nothing stings like the truth. Krugman gives one example, and I give a similar one (and why I think the worship of formal math explains it) in Chad’s thread. They almost have a cargo cult view of science: since physics uses math and physics does good science, if we use lots of formal math we will be doing good science.

But Krugman downplays what has led to the success of evolutionary biology: the triumph of data. In fact, there was a period where evolution was disparaged by other biologists because it was viewed as “just so stories”–tales with no data to support them.

I don’t think he does, but maybe he (like me) doesn’t know enough about the “stamp collecting” period of evolutionary biology when there were lots of irrelevant data and little relevant data. Economics has lots of data. Too much, perhaps. One key role of theory in science is to tell you WHICH DATA are important, but that only works if people then go out and seek those data … and then reject and refine the theory based on those results.

A good example from physics would be spectroscopy. Lots of pretty postage stamps, all in pretty tables and even fit by clever formulas, collected by bored and boring people whose work was totally out of fashion. Then came the Bohr model, which predicted new things they could measure. (In the case of Zeeman, it had already been seen but not appreciated.) Spectroscopy took off, now with a specific purpose, and the new data all said Bohr was wrong, wrong, wrong. It took 12 years for “wrong” to fully sink in, but when it did, quantum mechanics was the result.

…but the same $700 billion package could have employed 6,000,000 people at $3000 per month tax-free for about 40 months, with no theoretical framework whatsoever except giving jobs to the jobless, and if our moribund economy still didn’t have a pulse after 40 months, at least tax-payers would have had some brand new bridges and thousands of windmills to show for their money…

Not really. You just spent all of the $700B on salaries and none of it on stuff like concrete and trucks.

Once you have 6,000,000 people on a construction gang, they can probably expropriate whatever they need in the way of cement and wheelbarrows, and likewise the “excess property” of citizens like “Troublesome Frog.”

A key observation is that evolutionary biology, ecology, and some behavioural biology are actually (not just apparently) very closely related to economics. “Complex adaptive systems” is the term of art describing them all. Unfortunately, we haven’t made much progress coming up with powerful (elegant) ‘laws’. It is really quite difficult. However, we have done a fine job illuminating a lot of dead ends and ways NOT to approach problems. For one, over-generalization is a very tempting but bad idea.

The freshwater vs saltwater thing keeps making me think of the drift vs adaption debate. Both are wrong (it is a mix of course), yet we still get pitched battles over which wrong framework makes the ‘best’ model.

I assume Krugman’s real complaint against Galbraith is what Krugman has spelled out in some of his previous writing: Galbraith was a non-modeler. A large proportion of the academic economics profession believes that economics is pretty much all about models, and nothing else rates.